Obama and McConnell are Playing the Country – and Mainstream Liberals are the Instrument of Choice

Brad DeLong worries that President Obama does not have a strategy to persuade Mitch McConnell and Senate Republicans to back down from their “crazy” threat on the debt ceiling and force them to accept a “real deal”:

I don’t see a strategy from Obama to convince Senator Mitch McConnell (R-KY) and the other debt-ceiling hostage-takers that Obama has a path for what happens after the debt ceiling is breached that he prefers to a real defusing deal.

DeLong’s description here is slightly confusing, because the debt ceiling has already been breached. It was breached six days ago, and Treasury Secretary Geithner has already informed Congress that the US Treasury is now taking a series of extraordinary accounting measures to continue making all of the government’s payments without increasing the nation’s total debt obligation. The estimate is that we have a couple of months before the government runs out of the kinds of accounting tricks that will enable the country to avoid defaulting on some its payment obligations without issuing debt above the current statutory limit. So I assume DeLong just misspoke here, and by “breaching the debt ceiling” he actually means “defaulting on payment obligations”.

But note DeLong’s presupposition that Obama has a “real deal” he is prepared to make in exchange for Republican action to “defuse” the debt ceiling. Presumably this deal would involve enacting the sort of debt ceiling overhaul legislation the two sides have mooted over the past year. The debt ceiling would henceforth be automatically extended as needed, but Congress will get to pass some kind of meaningless finger-wagging resolution each time. Obama will presumably deliver Democrats to a package of spending cuts and tax increases in exchange.

Of course, if Obama is negotiating with Republicans on a deal to exchange spending cuts – presumably including entitlement cuts – for a debt ceiling reform, then his commitment last week and this weekend that he would not negotiate over the debt ceiling law is just the usual “I will not negotiate with terrorists” falderal to cover a back-channel negotiation. McConnell certainly believes he is in the middle of a negotiation with Obama over a debt ceiling compromise, and a compromise on the precise shape of further fiscal contraction.

With John Boehner weakened and out of the picture, McConnell and Obama are the two principals now. My guess is the latter two already know exactly where this is going to end up: with conservatives accepting a few more tax increases and liberals giving up the store on entitlements and embracing Obama’s insistent and economically incompetent brand of Shared Painer austerity – all while celebrating a change in the debt ceiling law as a great progressive victory.

Note that Obama and McConnell have already succeeded in steering liberals into a moral panic over the debt ceiling, and in inducing the requisite sense of default hysteria. The liberal discussions over the past several days have all been obsessed with what to do about the debt ceiling – with the more important matter of the upcoming sequestration cuts and the government’s contracting and recession-tempting fiscal position taking a back seat. Obama and McConnell have succeeded in changing the conversation from one over the role of fiscal policy activism in generating economic growth and jobs into a panicky secondary conversation about debt ceilings, defaults, and other apocalyptic nightmares. Many liberals will now probably be happy to trade away entitlement cuts to save the country from the dread jaws of default.

There are various ways of circumventing the debt ceiling, including platinum coin seignorage, 14th amendment legal claims, consols or other exceptional devices. Successfully employing one of these tactics would presumably weaken the Republican bargaining position. But to expect President Obama to make a move of this kind presupposes that he actually wants to diminish Republican leverage. I don’t think he really does want to reduce that leverage. He wants to exploit that leverage to manipulate his own party into accepting the entitlement and other spending cuts he is determined to ram through. Obama and McConnell are going to negotiate this business among themselves, and deliver some combination of Republican-style austerity and Obama-style austerity. They have the country lined up right where they want us.

The fact is that the US actually needs to run larger deficits, and invest heavily in employing our many unemployed people and mobilizing resources to meet our many unmet needs. But both parties in the US appear to have caught the European austerity disease. Wolfgang Münchau writes today in the Financial Times about the US’s new misguided pursuit of austerity:

When viewing the US fiscal stand-off from Europe, it all looks eerily familiar. The US has become very European. But for me the main problem is not an inability to deal with the structural deficit, as the Economist argued in its latest cover story, but rather the contrary. I fear that the US is blindly rushing into semi-automated austerity, which is exactly the mistake we have made in Europe. The problem is not the size of the national debt as such, which is manageable in both cases, but our policies in dealing with it.

Münchau is surely right. But rather than learn from the experience of Europe, Washington is following its example and engineering the same misguided program of prolonged stagnation – and possibly a second recession – that has been foisted on many of our European friends by their misguided or malevolent leaders. Some liberals and progressives in the US continue to write as though a fiscal program for growth is still available, so long as Obama stands tall against the debt ceiling and Republican blackmail. They seem not to have noticed that fiscal expansion is not even on the table. The entire Washington debate has moved to a choice between Republican cuts-only austerity and Obama’s Shared Painer austerity. If a renewed drive for fiscal activism is to take shape, it is not going to come from the White House.

Now I agree that minting a platinum coin to circumvent the debt ceiling can have a variety of beneficial effects, particularly on the public understanding of our antiquated and plutocratic system of public finance. People will begin to wonder why we are issuing so many bonds and delivering totally unnecessary interest profits to surplus capital, when we can simply create the spending balances we need and manage those created balances in ways that achieve our many unmet national needs while avoiding unacceptable levels of inflation. But I think we need to keep our eyes on the ball here: the problem facing the country is the totally inadequate fiscal policy response to massive unemployment and prolonged economic stagnation. The debt ceiling is a side-issue and is being exploited as a political smokescreen by the conservative neoliberal leadership of both parties.

For a sad example of the type of liberal instrument that Obama plays so well, consider this piece today by William Saletan. It concludes with this manifesto of post-election partisan confidence:

I feel bad for McConnell. He’s right that our debt is too high and our entitlement programs are out of control. He’s right that we need to means-test these programs and raise the ages of eligibility. But the debt-ceiling and sequester deadlines won’t force us to make those cuts any more than the fiscal cliff did. Politically, those deadlines are empty threats. Republicans will have to bargain for entitlement cuts, and that will mean swallowing tax hikes. If that wasn’t obvious before McConnell’s interviews, it is now.

Note the classic liberal false bravado masking craven acquiescence in a conservative economic agenda. Saleten has totally bought into the Shared Painer austerity agenda, but imagines he is some kind of tough guy for insisting that the recessionary and anti-progressive fiscal contraction must come from both tax hikes and entitlement cuts. Republicans will have to bargain for their entitlement cuts, for their further castration of the public sector and for another victory in their long war on progressive government.

25 Responses to Obama and McConnell are Playing the Country – and Mainstream Liberals are the Instrument of Choice

Great post as usual, Dan. One can only assume that this absurd political theater will continue for some time under the guise of various manufactured fiscal and debt crises. We are very much in need of some kind of catalyst at this point, an Arab Spring / Occupy Wall Street type public outcry that is directed right at Washington and it’s inability to govern. I just don’t see the conventional wisdom changing at all from within the beltway, we need serious external pressures.

The power “to coin money” and “regulate the value thereof” has been broadly construed to authorize regulation of every phase of the subject of currency. Congress may charter banks and endow them with the right to issue circulating notes,1281 and it may restrain the circulation of notes not issued under its own authority.[] To this end it may impose a prohibitive tax upon the circulation of the notes of state banks[] or of municipal corporations.[]

Date moving up as we speak Dan: “The U.S. government could exhaust its ability to meet all its financial obligations as early as Feb. 15, according to a new analysis by the Bipartisan Policy Center…..”

Dan, I’m so glad that you put your finger on the Plutocracy which rules us. This certainly explains why Obama not only seems to be, but is, a compliant co-conspirator with the rest of our governing leadership. He’s even more so than before, but why, certainly it can’t be about election, so, it must be about both his “legacy” and his future employment. I am so sick of hearing the mainstream media make it a war between progressives and conservatives. But, then again, the mainstream media is the plutocratic mouthpiece of our society, since 99% of what passes for popular media is nothing but a small group of monied interests interested only in the status quo (all six of them). Why would any realist ever expect rational policies, programs, arguments, or legislation? It ain’t happening, not now and not ever.

Dan,
“People will begin to wonder why we are issuing so many bonds and delivering totally unnecessary interest profits to surplus capital, when we can simply create the spending balances we need and manage those created balances in ways that achieve our many unmet national needs while avoiding unacceptable levels of inflation”

THIS quote from your story is the heart in the matter. Creating Trillions out of thin air for banks but broke for the citizens and economy is beyond incredulous.

The banks have been fronted ridiculous profits from the govt, via the fed, to pay these supposed fines, which will never go to help the people or the economy.

“The debt ceiling is a side-issue and is being exploited as a political smokescreen…”

This is right on target. All I would add is that the Right makes no bones about this. They say straight out what they are doing–using the debt ceiling to force spending cuts.

Rep. Greg Walden (R-Ore.) said it today, in announcing a bill to foreclose the PCS option: His entire justification for the bill is that “We must reduce spending,” coupled with the usual mumbo-jumbo about the Federal government facing the same financial constrains as any household.

So part of the problem we have is that one side knows perfectly well that the debt ceiling is a proxy for a fight over fiscal policy, and openly treats it that way. The other side never makes the contrary case: never argues that the debt ceiling (along with the other self-imposed fiscal constraints) is preventing us from implementing the fiscal policies we need, to get out of this whole.

So yes evidently the administration cares more about being seen as the champion of ‘shared pain’ austerity, than it does about, say, full employment. This is bad enough on substantive grounds. But it’s also a crippling position politically, because it leaves them arguing against the debt ceiling nonsense on narrow procedural and ‘fair play’ grounds, rather than making a full-throated argument against the conservative’s underlying rationale, that spending cuts will save us.

Right. And when Obama trades big cuts for the debt ceiling reform, a whole bunch of liberals will say, “It was worth it, because now we will never have to deal with the debt ceiling again! And we also Fixed the Debt!”

“evidently the administration cares more about being seen as the champion of ‘shared pain’ austerity”
__

I now get to magnanimously share some more pain. When I look at our IRAs (maybe ~ back now to where they were 6 years ago) and the 20% or so loss on my house market value (and I’m one of the lucky ones, bought before the run-up and took out a 15 yr 5% fixed note), hard to see what “gain” I shared in that I now have to turn loose of to help out.

Since all money is credit and an economy thrives on an optimum amount of credit why shouldn’t government be in the business of creating credit as well as private banks particularly in a recession when the private banks are reluctant to lend? Why also given that credit is the driving force of an economy should government have to pre-fund their credit issue when the private banks don’t have to?

What you’re missing is the motive. Obama is not ignorant of federal financial reality. Nor is Bernanke. Nor is McConnell. They know exactly what they are doing.

So why is he pushing for austerity. What is the motive? Deficit reduction requires social spending reduction which increases the income gap between the rich and the rest. And it is the gap, not absolute income, that the upper .1% income group cares about.

If you have $1 million, when everyone else has $1 million, you are not rich. But if you have $1 million, when everyone else has $1 thousand, you are rich and powerful. Without the gap, no one is rich.

The .1% have bribed the politicians (via campaign contributions) and the media (via ownership and advertising revenues) to tout the need for deficit reduction. So Obama’s motive is to please his employers.

Without the motive, the whole premise becomes suspect. The man-in-the-street doubts Obama doesn’t understand federal finance, so is reluctant to believe Monetary Sovereignty. But when you explain the motive, the public, which is predisposed to hate the rich, suddenly “gets it.”

“…The fact is that the US actually needs to run larger deficits, and invest heavily in employing our many unemployed people and mobilizing resources to meet our many unmet needs. But both parties in the US appear to have caught the European austerity disease…”
The solution to the problem is clearly identified, as it has been since 2008, even if not widely reported. Yet there still remains the perverse intention to inflict the debilitating disease on the economically vulnerable. The culpability of the media in this tragedy has been identified since 2009: http://fair.org/extra-online-articles/the-deficit-distraction/
Last paragraph there, pivot and all, sums it up.

“…But to expect President Obama to make a move of this kind presupposes that he actually wants to diminish Republican leverage…”
Many of us for some time now have been disabused of the notion that in our midst is even a fumbling FDR, which would be an improvement on the status quo. The game of both sides playing to the camera with doomsday scenarios has become jaded, predictable, even if to an increasing minority.

And when it’s their turn and presented with the opportunity, the other side will surely know what to do with the PCS. Clearly, Pangloss is no ‘role model’.

There has been increased public interest in the trillion coin solution, and maybe the President is thinking of that. But I think we can’t do that without knowing for certain whether there really is a national debt to begin with. There is no authorization for the Treasury to buy securities that have already been redeemed by the Fed for the government. It would take a separate authorization by Congress. But, of course, if there is no national debt, there can be no debt-ceiling. And I think arguing this would be the counter-strategy the administration needs. How might the argument go?
Congress wishes to spend with a deficit. Treasury must get money for the deficit. It “borrows” the needed money by issuing Treasury securities (IOU’s + future redemption date) and putting them up for sale at public auction. Banks through bidders bid on these securities, and some banks win the bids and are given possession of the securities in return for sending the money to the Treasury. At this point there *is* a debt of the United States to the banks.
But the banks’ that bought the securities have a big reduction in their reserves when they send off the money to the Treasury. That constrains their ability to lend, which is their livelihood. So, they may take the securities back to the auction and put them up for sale again. The Fed comes along, maybe after the securities mature and “buys” them by putting money it creates out of thin air in the banks’ reserves. In doing so, the debt of the United States has been redeemed at the banks.
But is there now a debt of the United States to the Fed? Everyone seems to think so. It is like everyone seeing the Emperor’s new clothes. But if we look at what the Fed is and what it has done, we come to a different conclusion. The Fed is an agency of the government, independent within the government, but not totally independent of the government. It is just independent of political influence. It is still government, created by Congress and given powers to buy securities with money creating powers. See the Fed’s FAQ’s. Since 1971 when the dollar went off gold as a backup, we have had pure fiat money. Some think the United States still owes the Fed for its buying of the securities. There is a relatively small transaction fee of 6% of the interest on the security that Treasury needs to pay. But not the principal. That is because the Fed is government, buying the securities with fiat money created out of nothing, a power granted only to Congress and delegated by Congress to the Fed. So, the Treasury doesn’t owe the Fed for the principal and interest paid. It is like a family in a state with property in common: the husband borrows some money and then the wife pays it back. The family is at this point absolved of its debt. Or think of company A. It’s production division needs money and borrows it from a bank. But then the finance department pays off the debt to the bank. Company A no longer has a debt.
The Treasury could pay off the transaction fee of 6% of the interest on the security by using taxpayer money. But it can do it without taxpayer money by issuing further securities to create a fund to pay the transaction fees on the securities that the Fed has bought and the securities it may buy in the near future. The Fed will buy these and redeem the U.S. debt to the banks on that, so Treasury will pay the fees with debt free money. A little extra new money has gone into the economy with the Fed’s buying the securities created for paying the transaction fees.
There should be no debt at the Fed on any securities it possesses.
There can be no debt ceiling on securities held at the Fed. There is no debt. That gives the government more freedom to deficit spend, as long as doing so is not inflationary, which would occur if the economy were at full production with full employment.
I’d like MMTer’s opinions on this.

The problem, as I see it, with the $10 Trillion coin solution to the debt problems, aside from the fact that there may be no national debt in the first place, has to do with how the Fed tries to control for inflation and fight deflation. It sells securities to drain money from the banks and it buys securities to put money into the banks. It also buys and sells securities to force the market toward its target interest rate, which is set to counter inflation, should it occur. Right now, in the deep recession we are in, the interest rate is close to zero.
If the Treasury were to buy all the securities held by the Fed, it would cripple the Fed’s ability to modulate the money supply, independently of the big spenders in Congress. So,
if MMters want us to go back to greenbacks, U.S. Treasury Notes, how will that system control inflation and fight recessions? You can’t take away one important feature of the current system without implementing something comparable in a new system. I would be reluctant to put it solely in the hands of Congress, however democratic it is supposed to be. Just look at what we have in Congress now.

inflation is usually a function of demand exceeding capacity (unless banksters are attacking the commodities markets). with the current ouput gap, we have a lack of demand vs. production capacity at the moment. The govt needs an unrestrained ability to deficit spend till we get unemployment back below 4%.

If you went to a greenback type of float, you need a highly responsive taxing method to tamper demand when needed. This would seem like the ultimate tax plan. it could also be used to replace income tax. it’s FEF (fast/efficient/fair)…no delay, very little administration, no loopholeshttp://universalexchangetax.com/

So, the benefits of debt free floating currency and highly responsive & efficient taxing method, gives best of both worlds.

but why would we indulge ourselves and remove the suffering of economic brutalities we inflict up ourselves the builds “character”….(sarcasm)

Another implication of there being no national debt at the Fed, is that we do not need to change hardly anything in the system as it now functions. Convoluted though it may be, at least it achieves the same thing as if the Treasury issued and spent its own money in deficit spending. The aim is to get debt free money to spend and to add new money into circulation. The Treasury may get debt free money from the banks, and the banks get new money to replace their old money sent to the Treasury, which no longer owes them for it. Money being fungible it would be the same as if the Treasury created its own money which could be thought of as the new money, while the banks still have their old money. So, we can just get along without the politically complex process of rescinding the old system and trying to implement a new system, regardless of how rational the new one is compared to what we do now. We just have to get all the parties involved to recognize what the system is in reality. The Fed is government. (The Fed’s FAQ’s already says so). It does not produce a national debt that accumulates year after year, because it buys the securities and in the process redeems them, that constitute the debts. It has means for modulating the money supply to fight inflation and deflation. But that uses Treasury securities as the tool. Fed sells securities when there is inflation to drain money from the banks. It buys securities to add money to the banking system during deflations. Treasury needs to use securities to borrow money from banks, knowing the debt will be redeemed by the Fed when it buys up the securities. This way the Fed grows its pile of securities for managing the money supply. The Fed even swaps mature securities for new securities, which are easier to sell. (This is done now without Treasury owing the Fed for anything but the new securities). So, the Fed becomes not only the issuer of the currency, but also the redeemer of Federal debts. But Fed should not expect the Treasury to be buying back its mature securities with money created by issuing securities to be bought by banks and then by the Fed. That of course rolls over the debt year after year. But actually it does not perpetuate the debt. It’s revenue neutral and equivalent to just swapping the mature securities for a new equivalent security. The new securities are not debts between the United States and the Fed. They are not debts for anyone until they are sold to someone not in the government. So, rather than trying to convince everyone to change the outer appearances that still produce the same outcome, we should continue with the current one, but with new understandings.

So why do we need the Federal Reserve ? The US Treasury could issue its own money debt free. The only purpose of taxation would then be to destroy money as needed, in order to control the rate of inflation.

Come to think of it, this reminds me of the reunification of Germany in 1990, when West Germany swapped West German Deutschmarks for East German Ostmarks at parity. In a similar way Federal Reserve Notes could be exchanged at par with US Treasury Notes.